By R. Sasankan

Competition is an over-abused expression in India's tightly regulated market where outcomes are decided more by whimsical policy-making than a free play of market forces. The petroleum sector has had a very chequered history in its long and fruitless quest to find a workable model incorporating the elements of competition and a modicum of free and fair rules of the game. Unfortunately, the hapless consumer of petroleum products has been denied the freedom of choice flowing from the benefits of price and quality that might be expected from an unfettered play of market forces.

The late prime minister, Mrs Indira Gandhi, brought the country’s petroleum sector almost completely within the fiefdom of the public sector. Her son, Rajiv Gandhi, took the first stab at private sector participation in the petroleum industry with the creation of the Mangalore Refineries and Petrochemicals in which the Aditya Birla group became a partner. Later, Reliance Industries and Ruias of the Essar Group were allowed to set up refineries and retail outlets with the aim to encourage competition.

In October 2019, the Modi-led cabinet appeared ready to take a giant leap forward when it decided to privatise the Mumbai-based Bharat Petroleum Corporation Ltd (BPCL). At a press conference, then petroleum minister, Dharmendra Pradhan, said the government was keen to ensure that an international oil major picked up the government's 52.98 per cent stake in BPCL so that the sorely-needed “competition” could be injected into India’s downstream sector.

It was obvious that the government had Aramco of Saudi Arabia in mind. After all, the Saudi oil giant had articulated a desire to enter India’s vast retail market. The pandemic Covid-19 wrecked Aramco’s plans and threw a wrench in the privatisation plan for BPCL. The government has gamely pressed on with its decision to sell of its stake in the public sector refinery. After a long and arduous process, there are three players in the fray for BPCL: the US-based Apollo Global, 1 Square Capital and Vedanta. The first two are US-based private equity companies and the third an Indian company with interest in mining and E&P.

Once again, the government’s dream of fostering competition has been queered. Private equity companies -- whether Indian or foreign -- do not run oil companies and their declared intent is to dismantle the acquired assets and sell them to maximise profits. Such an outcome is politically inconvenient for the Modi government: BPCL is rated as the best-run oil marketing company in the country and shredding it to bits is just an unimaginable and unacceptable outcome for most Indians.

It is now becoming increasingly obvious that the government made a colossal blunder when it decided to bar Indian PSUs from bidding for BPCL. India’s largest oil marketing company, Indian Oil Corporation (IOC), was keen to throw its hat into the ring and made its intentions known in no uncertain terms. In its enthusiasm to rope in a foreign oil major into the country, the government decided to keep IOC out of the bidding process -- overlooking the fact that the mere participation of India's oil behemoth would have prompted foreign companies to ramp up their bids.

With the government deciding to go ahead with the bidding process, it must now pick from one of the three in the fray. Among them, Apollo Global appears to have nudged ahead of the other two. Even as the government is keen to maximise the value of its stake in BPCL, it does not want the company to be carved up and sold -- which makes a lot of sense from the perspective of a private equity player but not for a government that is looking to stoke competition in the sector.

Apollo Global is believed to have given an assurance to the government that BPCL’s status will not be altered for the first four years. It has indicated a price of above Rs 900 billion for the government's stake. Still, it looks politically embarrassing for the government to sell BPCL to a private equity company. It has to also deal with a couple of other regulatory issues arising from BPCL’s stake in Petronet LNG and IGL which cannot be resolved that easily. The Modi government is unlikely to pressure the regulator SEBI to grant a favourable decision.

So, what happens if the privatisation plan hits a gridlock?

One of the most compelling reasons for pursuing an aggressive privatisation process by selling the government's stake in a vast number of public sector companies is the fact that the proceeds will help it trim the mounting fiscal deficit. But this masks the fact that the fiscal deficit isn't such a huge problem as is being made out. The former finance secretary, Dr Vijay Kelkar, can help the government to find a way out as he did in the past with his plan for cross holdings.

The government should enlarge the scope of bidders by including the PSUs which were kept out of the first round of bidding. IOC will definitely toss in its offer. There could be another formidable new player in the revised round -- Gautam Adani who is preparing to enter the petrochemicals sector. But he has one major drawback: he doesn't have a strong raw material base to support his endeavour. That problem can be solved if he acquires a refinery. Neither IOC nor Adani will inject any competition in the downstream market. If the Ambanis and Ruias could not do it, it is going to be a bit of a stretch to imagine that the Adanis will be able to do it.

Competition in petroleum, more particularly in the downstream sector, will remain a dream for the time being. There is nothing wrong in selling BPCL and HPCL to whoever pays the highest price. Even foreign oil companies can acquire them provided we regulate the sector meaningfully. The larger question is whether the petroleum ministry will permit a formidable, independent regulator to function. The present regulatory regime is pretty useless.

Talk of competition without an effective regulator is just a lot of hot air.